Bidding Behavior in Pay-to-Bid Auctions: An Experimental Study∗

This paper experimentally studies the pay-to-bid auction format and compares average revenues in the discrete time simultaneous decision model to average revenues in the continuous time setting experienced in pay-to-bid auctions on the internet. For both of the group sizes studied, 3 and 5, there is no difference in the average revenues between the two environments. However, there is significant over-bidding, as has been observed in pay-to-bid auctions on the internet, for both group sizes and this over-bidding depends on the number of participants. Over-bidding decreases with experience, and strategic sophistication plays a large role in the outcomes of individuals. Some of the least successful subjects cease auction participation all together, suggesting that the pay-to-bid auction mechanism can only sustain revenues above the value of the prize as long as new inexperienced participants can be attracted. JEL Classifications: C72, D03, D44